Hostile takeovers and investment banks

Description of White Knight defense strategy has been mentioned in the earlier section. In a final bid to stop Mittal from taking over Arcelor, the management tried one last time to put up a defense in the form of a merger with the largest Russian steel company Severstal. Again the management did not agree to call the strategy as a white-knight strategy, stressing instead on the advantages of the deal. While Severstal was already linked with Arcelor via technical agreements and shared investments, the deal was generally considered to be inferior to Mittal and became a turning point in the merger between Arcelor and Mittal.

The issue that appealed best to the management was that Severstal was a European company, as against Mittal Steel, which it considered merely as a third world company and hence beneath its choice of a partner for a merger. However, the battle was proving to be a long and futile one to the shareholders, who insisted on having a right to vote on the Severstal deal – a move that was outright by the management fearing an opposition of the decision, which is legal as per the European laws.

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Again as per Luxembourg’s laws, the Russian bid could only be vetoed if 50% of the shareholders were opposed to the bid. This was clearly a problem, since the attendance in the meeting are never more than 35 %. However, the shareholders used another Luxembourg’s law, according to which the management has to meet with the shareholders when more than 20% request for the meeting.

The meeting was held, and while the deal will Mittal was rejected yet again, the company was asked to present another deal with better terms.

In the meantime, the management themselves tried to convince the investors and shareholders that the deal will Severstal is a better one. However, both the investors as well as shareholders did not agree with this idea. All this pressure was taking a toll on the management which succumbed to the pressure and after a nine hour long meeting decided to accept the Arcelor deal. In general, the investment banking firm plays an advisory role in the M&A market. In some cases, notably leveraged buyouts, the firm may also put up capital and take a position.

But most of the time the investment banking firm is offering advice, perhaps negotiating on behalf of a client and being compensated through something analogous to a brokerage commission. Fees in mergers and acquisitions generally take the form of a percentage of the value of transaction (Williamson, 1988, p. 224). The investment banking advisory fees in the Arcelor-Mittal deal was estimated to bet between a whopping US $90 million and US $100 million, on both the sides of the deal (Cagna, n. d. p. 8-9).

One of the most interesting parts of the Arcelor-Mittal deal was perhaps the contrary role of the investment bankers. Generally, at least the more substantial M&A groups within investment banking firms prefer to be associated with defending against a hostile takeover rather than with the aggressor (Williamson, 1988, p. 237). Arcelor-Mittal case was however an exception to this rule. It was usually an unspoken norm of the Continental European banks that they would defend any European company against a non-European hostile takeover bid.

While unspoken, this stand of the investment bankers had been so reliable that it was practically considered to be a strong barrier against the hostile takeover bids for companies based in continental Europe. Societe Generale proved to be an exception in this case. The bank’s French origins did not stop it from supporting the aggressor side of the deal – despite the clearly hostile stands taken by both the French government and the French media. All major M&A groups occasionally find themselves associated with the aggressor in a hostile case, because the maintenance of long-standing relationships demands that a firm assist a valued client.

Usually Goldman Sachs is considered to be an exception to this rule (Williamson, 1988, p. 237). However, in Arcelor-Mittal case, even Goldman Sachs had taken over the mandate to arrange loan to raise the cash part of the deal. It was in fact one of the first two banks being mandated for raising cash – together with Citibank. The matters became even more interesting when Goldman Sachs changed its stand in the middle of the deal, when Severstal entered into the takeover arena, as a white knight.

In fact Goldman Sachs also attempted to convince the minority shareholders of Arcelor to force a traditional vote favoring the Arcelor-Severstal deal (Metal Center News, 2006). However, the investment bank was yet again a part of the final cash offer of 8. 1 billion pounds made in June 2006 that was finally accepted by the Arcelor management. The deal between Arcelor and Mittal was hence also extremely significant regarding the change in the way investment banks were perceived by the Continental European business community.

They could no longer rely on the blind acceptance of the local investment banks when opposing a hostile bid, and had to contend with the fact that the banks were capable and willing to join the aggressor in case the deal proved to be lucrative enough – as is evident in case of Societe Generale. Also the business community in general had to face yet another unpleasant fact that the loyalty of the investment banks could not be taken for granted while pursing any deal, which is an important strategic aspect in any hostile.

As is evident in case of an extremely reputed bank like Goldman Sachs, the investment banks were fully capable of switching sides any number of time, should any opposing party in a hostile bid come up with a better deal. The steel industry has undergone considerable restructuring and changes over the years due to production costs caused by cyclical boom and bust periods in the world economy. Although there has been specific radical innovation in the steel industry in recent years, the industry was under pressure to respond to production improvements and global demands.

This commodity depends as much on customer demands for steel as it does on coal and iron ore prices. Driven by cost and commodity prices, steel industries in the world were looking for booth management improvements and the provision of superior quality products and services. Many tradition industry sectors have been transformed through path breaking technological and organizational innovations. Arcelor-Mittal deal was a landmark in the steel industry. Mittal Steel’s decision to take over the biggest European steel producer, Arcelor, with a Euro 33.4 billion cash and stock offer surprised European companies.

The media glare was entirely focused upon the traditionalist Continental European companies and their management style as well as the fact that a company from a third world company had become such a significant steel player in steel production and had the audacity to make a hostile bid for one of the largest European steel producers. Since the takeover, Arcelor-Mittal became the largest steel manufacturer in the world (Liyanage, Wink, Nordberg, Jenni, 2007, p. 178-179). The deal was also significant in many other ways.

It was one of the largest and most significant deals in Continental Europe that had succeeded despite the many business and cultural barriers present in the region. Also the fact that the deal had succeeded in the face of resistance from governments, chiefly French and the French media, was also a major shock. This combined with the fact that despite their disapproval, the government could hardly do anything to stop the deal from going through, showed that the dynamics of business operations were changing rapidly in Europe, and that it was high time that the presence of the so-called barriers were reevaluated.

In fact some of the pre-supposed barriers like the cultural differences, the shareholding mechanisms and the role of governments hardly seemed to deter Mittal from going right ahead and forging the deal, despite the stiff opposition. In addition to this, yet another significant factor was the role of investment bankers in the deal. Usually the role of investment bankers is pretty much at the backside of the deal and they rarely gain media attention. This fact was also reversed in this case, as the investment banks became one of the major source of debates in relation to their role in the deal.

One of the issues was that the local investment banks were practically relied on to oppose any non-European hostile bid, and act in league with the defending company without any thoughts. However, with the Societe Generale taking the risk and joining the opposition in the face of stiff resistance from in home country government and media, showed that the bottom line and future profits were more important to investment bankers than mere regional loyalty. Also as in the case of a reliable and reputed company like Goldman Sachs, it was expected that the firm would stick to one side and try to work the deal through.

The company astonishingly did change its stand not once but twice, finally settling in with Mittal’s side showing that the only side which an investment banker could be expected to take was the winning side. The role of shareholders in the deal can also not be ignored. Prior to the deal individual shareholders in Continental European companies did not play any significant role in the way the companies dealt with business deals such as mergers and acquisitions. Arcelor-Mittal was an exception even in this case.

The shareholders here tried to find alternative means to force the management to take notice of their views and take them into consideration. The case was also interesting as the views of shareholders and the management team regarding what they considered as a viable and profitable option was diagonally opposite. Ironically the shareholders’ point of view was the one held by analysts and the highly skilled management team seemed to merely act on a ill-timed ego trip, which was in fact and embarrassing issue.

Ultimately it was the shareholders who forced the management to consider the Mittal deal, even though they were extremely reluctant to do so. The defense strategies taken by the Arcelor management team was also topic of much debate. The first line of defense taken by the management team was a ill-thought of smear campaign aimed to tarnish the image of Lakshmi Mittal and the companies held by him. The so-called concerned of the Arcelor management team and French government in general and the Arcelor CEO Guy Dolle in particular, were superficial to say the least.

In fact the family style of management of Mittal was bettered to a more corporate style of management, because they chose to accept the criticism where it held merit. Also some of the charges levied by the management regarding the management and health standards of the various steel plants held by Mittal served to turn the erstwhile hostile media and the powerful trade unions in support of the deal, since the claims made by Dolle were melodramatic instead of having a basis in reality.

Though the management never accepted it, both poison pill and white knight strategies were employed to stop the deal from going through. Surprisingly both the schemes were not only unsuccessful; they also backfired badly on the management team. In the first case, the attempt to block Mittal by stopping the sale of Dofasco was so transparent that many analysts were amused by the effort, though this did anger the shareholders enough to demand an immediate general meeting.

The white knight strategy by bringing in a merger with Severstal, as opposed to Mittal was a fairly decent option, one that might have had a chance of succeeding had the company not been so defensive in its outlook. The deal came at a much later stage, by which time the deal offered by Mittal had become extremely lucrative, so much that it seemed ridiculous to opt for the Russian deal, just to pacify the Europhilic tendency of the Arcelor management.

REFRENCES https://www.thetimes.co.uk/